Dairy Prices Seen Declining by Rabobank as Chinese Demand Slows

Why the international bank expects an "orderly easing" of dairy prices, not a crash.

By Elizabeth Campbell

Dairy prices will slide over the next year amid increased supplies from exporting countries and weaker demand from China, according to Rabobank International.

U.S. and European producers are responding to "exceptionally strong margins" and increasing output after milk prices rose and feed costs dropped, said Tim Hunt, Rabobank’s global dairy strategist. Slower economic growth will limit Chinese demand, especially after many consumers "significantly bought forward" supplies in the first three months of 2014, he said.

World dairy prices, tracked by the United Nations, reached an all-time high in February, and rose 29 percent in 2013, compared to a 3.8 decline in overall food costs. U.S. consumers may pay as much as 3.5 percent more for dairy products this year, the government has forecast.

"With increased export supply and China reducing purchases, the world is looking for other importers to take up the slack," New York-based Hunt said in a telephone interview. "With many of them experiencing currency falls against the U.S. dollar, their purchasing power has been reduced."

Class III milk futures, tracking a variety used to make cheese, on April 24 climbed to $24.32 per 100 pounds on the Chicago Mercantile Exchange, the highest for the most-active contract since trading began in January 1996. Prices that surged 26 percent this year may fall to $18.66 by the fourth quarter, Hunt said, reiterating the bank’s March forecast.

There will be an "orderly easing" of dairy prices, not a crash, because China buyers will come back to the market after a "temporary lull," said Hunt, who is scheduled to speak on the outlook for dairy at the American Dairy Products Institute and American Butter Institute annual conference in Chicago today. The rate of supply growth will ease in the second half of the year, he said.